WORKING CAPITAL-ppt
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Transcript of WORKING CAPITAL-ppt
WORKING CAPITAL
WORKING CAPITALWorking capital means current assets
such as cash, accounts receivables and inventory etc.
Working capital or circulating capital indicates circular flow of funds is the day-to-day or routine activities of business
The management of working capital is more important than the management of fixed assets
The fate of most of the businesses very largely depends upon the manner in which their working capital is managed.
DEFINITIONGerstenberg – “Circulating capital means current assets of a company
that are changed in the ordinary course of business from one form to another ,as for example , from
cash to inventories , inventories to receivable, receivables into cash.”
NEED OF WORKING CAPITALThe need of working capital to run the day
to day business of a firm can not be ignoredThe firm has to maintain an adequate level
of current assets to generate salesThe current assets are required, as the
sales generated by the firm do not convert into cash immediately
There is always an operating cycle involved in conversion of sales into cash
OPERATING CYCLEOperating Cycle is the time duration required to
convert sales, after the conversion of resources into inventories, into cash
It is the time interval between the cash collections from sale of the product and cash payments for resources acquired by the firm
Involves three phases:1)Acquisition of resources such as raw materials,
labour, power and fuel etc.2)Manufacture of the product which includes
conversion of raw material into work-in-progress into finishes goods
3)Sale of the product either for cash or on credit. Credit sales create account receivable for collection
CONCEPT OF WORKING CAPITAL
According to one school of thought, working capital represents all current assets of the Company. They believe that working capital represents those assets, which change their form during the process of production.
Working Capital = Total Current Assets According to the other school of thought,
working capital is the excess of current assets over current liabilities.
Working Capital = Current Assets – Current Liabilities
Cash
Raw Material
s
Finished Goods
Accounts Receivabl
e
Sales
Collection of Receivables
Purchase of Raw Materials
Work in
Progress
Thus, there are two concepts of Working Capital:
1. Gross Working Capital- i.e. Total Current Assets.
2. Net Working Capital- i.e. Current Assets –
Current Liabilities.
Gross Working CapitalGross working capital concept focuses
attention on two aspects of current assets management:
(a) What is the optimum level of investment in current assets?
(b) How should current assets be financed?
Net Working CapitalNet working capital is a qualitative concept.Measures both a company's efficiency and
its short-term financial healthIt indicates how much current assets are
covered by current liabilities.It indicates the liquidity position of the firm
and suggests the extent to which the working capital needs may be financed by permanent sources of funds.
TYPES OF WORKING CAPITAL
i. Permanent working capital
ii.Temporary working capital
Working Capital
Permanent
Variable
Initial Workin
g Capital
Regular Working Capital
Seasonal Working Capital
Special Working Capital
PERMANENT WORKING CAPITAL
It is the minimum level of current assets and cash needed for a day-to-day business operation.
This is permanent in the same way of the firm’s fixed asset but the need for the working capital fluctuates with that of the change in the amount of production and sales.
Initial Working Capital:
It is the amount invested in the firm by the owner during the initial period of operation .
These funds are used for making payment to the creditors, purchasing raw materials, etc,.. In the initial period.
Regular Working Capital:
A firm is always required to keep certain funds for its regular business operations, known as Regular Working Capital.
Regular working capital is the excess of current assets over current liabilities.
This is required to maintain regular stock of raw materials ,work-in-progress and also to maintain the definite level of finished goods.
VARIABLE WORKING CAPITAL
Also called as Fluctuating Working Capital.
It is a working capital which keeps on changing with the change in production and sales activities.
It is an extra working capital that is needed for funding the change in the level of production and sales.
Seasonal Working Capital:
Some business may need additional capital only during specific season or a specific period of time.
For e.g., (a)The company involved in the production
of umbrella need additional capital to meet the demand of umbrellas in the rainy season.
(b)The groundnut oil producers may have to purchase groundnut in a particular season and have to employ additional labour for that purpose. These may require additional funds for a temporary period.
Special Working Capital:
The extra funds/capital invested for overcoming the unexpected events like sudden increase in demand, downward movement of prices of raw materials, strike or natural calamities, etc is known as Special Working Capital.
Am
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s.)
Time
Temporary or Fluctuating
Permanent
Difference between permanent and fluctuating W C
Temporary or Fluctuating
Permanent
Am
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wo
rkin
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apit
al (
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Time
Thank YouSUBMITTED BY –
ARJUNMEHULSHARIQJASPALNEHA.S